CRISIL's ratings on the bank facilities and debt instruments of Raymond Limited (Raymond) continues to be on 'Rating Watch with Negative Implications'.
 
CRISIL has placed its 'CRISIL AA-/CRISIL A1+' ratings on the debt programmes of Raymond on 'Ratings Watch with Negative Implications'. The facilities in Raymond prior to the proposed scheme of arrangement, were reaffirmed at 'CRISIL AA-/Stable/CRISIL A1+' on September 30, 2019.
 
The rating action follows the announcement on November 7, 2019, that the company's board of directors have approved a scheme of rearrangement and amalgamation at Raymond, wherein the lifestyle business is being demerged into a separate company, and the other businesses comprising real estate including the 120 acre land bank in Thane (Maharashtra), automotive components, tooling and hardware, shirting, fast-moving consumer goods (FMCG), and the denim joint venture, will remain with Raymond.
 
The company is developing Phase I of its real estate project on up to 20 acres, and will continue to own additional 80 acres of prime land bank in Thane, becoming pre-dominantly a real estate entity over the medium term; the residual land of 20 acres out of 120 acres at Thane houses schools, trusts and other offices. Raymond will continue to own Park Avenue (FMCG), JK Super Drive, Kama Sutra, and KS DEOS brands; Revenue for fiscal 2019 (post demerger) amounted to Rs 1,549 crore and earnings before interest, tax, depreciation and amortization (EBITDA) of about Rs 100 crore (EBITDA margin 6.5%).
 
As per the proposed scheme, the demerged entity, Raymond Lifestyle, will house existing core lifestyle businesses of branded textile, branded apparel (under Raymond Apparel Ltd) & garmenting (totaling revenue of Rs 5,284 crore or 77% share of Raymond's consolidated fiscal 2019 revenue, and about 86% of earnings before interest, depreciation and taxes before unallocated expenses and including non-operating income [EBITDA] at 11.4% margin). Raymond Lifestyle would operate as a branded consumer business owning the brands ' Raymond, Park Avenue, ColorPlus, Parx, Ethnix, and NextLook.
 
Each shareholder of Raymond would be issued shares of Raymond Lifestyle in 1:1 ratio, in consideration for the demerger, and Raymond Lifestyle will also be listed, with its shareholding mirroring that of Raymond.
 
On October 9, 2019, Raymond announced sale of 20 acre of land parcel owned by its 47.6% associate company, JK lnvesto Trade (India) Ltd for Rs 700 crore to Elpis Ventures Pvt Ltd, an affiliate of Virtuous Retail South Asia Pte Ltd (the Xander group's retail arm). Net sale proceeds of Rs 350 crore has been received and used for debt reduction, thereby resulting in debt of Rs 2,420 crore as on December 31, 2019; thereby improving the financial risk profile and liquidity.
 
Raymond Lifestyle's consolidated debt post de-leveraging from land sale proceeds is expected to reach Rs 1,786 crore (about 74% share) as of fiscal 2020, and on a steady-state basis debt to EBITDA ratio is expected to be less than 3.5 times. Also, about 60% of cash and liquid investments is proposed to be transferred to Raymond Lifestyle. Raymond Lifestyle's credit profile will also benefit from its dominant position in the domestic worsted suiting business, higher operating margin, and strong retail presence, supported by established brands.
 
Raymond including Raymond UCO Denim Pvt Ltd, post demerger and deleveraging from land sale proceeds, is likely to have gross debt of about Rs 1,089 crore in fiscal 2020, translating into a very high debt:EBITDA ratio, with benefits from its real estate projects expected only over a 5 year period. Nevertheless, the gradual monetisation of the large land bank, and expected cash flow from its ongoing real estate project, has the potential to provide substantial offset against expected modest debt protection metrics for Raymond, post the demerger.
 
According to the management, the objective of this demerger is to unlock the potential of the core lifestyle business, simplify the group structure, and enable the entities to have a focused strategy, specialise in sustained growth, and thereby create value to various stakeholders.
 
The demerger is likely to take 6-9 months, subject to necessary statutory and regulatory approvals from Stock Exchanges, National Company Law Tribunal, minority shareholders, lenders, and creditors.
 
CRISIL is in discussion with Raymond's management to better understand the division of its assets, liabilities and the bifurcation of debt facilities; and will remove the ratings from watch, once there is better clarity, and announce the final action once key regulatory approvals, mainly from the shareholders and creditors, are obtained.
 
The ratings continue to reflect the Raymond's dominant position in the domestic worsted suiting business, established brands in the apparel business, diversified revenue streams, integrated operations with strong retail network, and adequate liquidity. These strengths are partially offset by an average financial risk profile, exposure to volatility in key raw material prices and foreign exchange (forex) rates, intense competition in the domestic apparel business, and demand and implementation risks associated with its real estate project.
 
Raymond continued to maintain adequate liquidity, as reflected in large unencumbered liquid investments of Rs 375 crore in mutual funds and fixed deposits apart from cash balance of Rs 81crore, as on September 30, 2019. Liquidity should improve with increased availability of working capital bank lines, which were highly utilised at about 82% between March-August 2019. The company continues to replace portions of its short-term borrowings, with long-term bank debt, within the next 3-6 months, which will lead to better balance of overall debt mix, as well as lower refinancing risk relating to short-term debt.

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Raymond and its 19 subsidiaries, including Raymond Apparel Ltd, JK Files (India) Ltd, Silver Spark Apparel Ethiopia PLC, Raymond UCO Denim Pvt Ltd; 50:50 joint venture with higher synergies with Raymond). The approach reflects similarity of some businesses, financial fungibility and a common management. CRISIL has also included Raymond's share of profits in its associates including PT Jaykay Files Indonesia, JK Investo Trade (India) Ltd, and Radha Krishna Films Ltd. The group is collectively referred to herein as Raymond.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Strengths
* Dominant position in the worsted suiting business: An established track record of over a century, a strong brand image, and large retail network have helped Raymond develop a healthy market position in the worsted suiting business. Raymond is India's largest manufacturer of worsted fabrics and wool blends, enjoying a dominant market share. It had 1,106 retail outlets branded as The Raymond Shop (TRS), as on December 31, 2019, spread across India and overseas.
 
* Diversified revenue streams: The revenue profile is well-diversified, with significant presence in branded textiles (46% of gross revenue in fiscal 2019), branded apparel (24%), garmenting (11%), and denim and high-value cotton shirting (15%) businesses. The company owns well-known brands such as Park Avenue, Raymond ready-to-wear, Colorplus, and Parx, and has also introduced the 'made-to-measure' (MTM) store concept to offer custom-fit solutions. Raymond is also present in the engineering segment, where it manufactures tools and hardware and automotive components (6% of revenue in fiscal 2018). It is the largest manufacturer of steel files, where the company is the market leader with a domestic market share of about 65%. The company has recently forayed into real estate development on a 20 acres of own land in Thane, which is expected to provide meaningful contribution to the group's cash flow over the medium term. 
 
* Strong retail network: Having one of the largest retail store networks across India and overseas (1,031 TRS, 67 MTM stores and 360 exclusive brand outlets as on June 30, 2019) has helped the company reinforce its market position. Raymond has also been expanding its dealership network to Tier II, Tier III and beyond cities and towns, and has over 20,000 touch points across the country. The company intends to add new stores over the medium term (largely through franchisee route) to leverage the healthy growth potential for branded retail apparel. During the first quarter of fiscal 2020, it had opened about 95% of additions through the franchisee route. 
 
* Strong liquidity: Liquidity remains strong though it has weakened from the past, and is supported primarily by large unencumbered liquid investments along with cash totaling Rs 497 crore, as on December 31, 2019. The liquid surpluses have been maintained over time, despite profitability pressures in the recent past.
 
Bank limit utilisation was high and averaged 81% during the six months through January 2020. However, capital expenditure (capex) needs are moderate and Raymond's annual long-term debt obligation is well spaced out with lower repayment of Rs 372 crore in fiscal 2020 as compared to Rs 589 crore in fiscal 2019; these are expected to be met through a mix of cash accrual and additional debt.
 
Liquidity is expected to improve, with rebalancing of its debt mix, in favour of long-term debt. 
 
Weaknesses
* Average financial risk profile: The financial risk profile remains constrained by moderate capital structure, debt protection metrics, and return on capital employed (RoCE).
 
Despite increase in debt levels, better profitability led to continued improvement in debt:EBITDA ratio to 4.8 times, interest coverage ratio to 2.6 times and RoCE to 11.5% in fiscal 2019. With lower capex requirement of Rs 200 crore annually, net realisation of land sale proceeds of Rs. 350 crore being used for debt reduction, the capital structure and debt protection metrics are expected to improve in the near to medium term. Expected improvement of the financial risk profile will continue to be monitored.
 
* Susceptibility to adverse movements in input costs: Volatility in cotton and wool prices have also led to fluctuations in profitability. Raymond imports bulk of its wool requirement from Australia and New Zealand; it maintains a hedge book for major portion of its related forex exposures. For instance, in the first quarter of fiscal 2020, increase in wool prices was largely responsible for a decline of about 245 basis points (bps) in the operating margin in the branded textiles segment margin, thereby weakening the overall operating margin of the company. Similarly, in fiscal 2019, increase in minimum support price of cotton, a key raw material, led to erosion in profitability in textile and denim players.
 
* Intense competition in the domestic apparel business: The overall readymade garments industry is estimated to be about Rs 5,258 billion in calendar year 2019 with exports contributing to 22% of the industry, as per CRISIL research estimates. The industry is highly fragmented with intensifying competition among the organised players as brand penetration is likely to increase over long term among leading players such as Grasim Industries Ltd (Grasim; rated 'CRISIL AAA/Stable/CRISIL A1+; erstwhile Aditya Birla Nuvo Ltd merged with Grasim) and Aditya Birla Fashion & Retail Ltd ( 'CRISIL AA/Stable/CRISIL A1+), with various brands, including Louis Philippe, Van Heusen, Allen Solly, and Peter England; Siyaram Silk Mills Ltd ('CRISIL AA-/Stable/CRISIL A1+'), Arvind Ltd (Arrow), and Provogue (India) Ltd.
 
* Exposure to demand and implementation risk in the residential real estate business: Raymond entered into real estate development business in fiscal 2019 to monetise the 14 acres of prime land parcel (out of the total 120 acres owned) in Phase 1 in Thane. Phase 1 of the four towers, costing Rs 880 crore includes development of 1.12 million square feet to be completed by fiscal 2024. With its prime location, attractive price point in the two-bedroom-hall-kitchen segment, and competitive pricing, the project has witnessed healthy sales traction with booking of 898 units up to December 31, 2019, on the four towers launched. Its phase-wise booking and development strategy and tie-ups with reputed contractors such as Capacite Infraprojects Ltd reduces implementation and funding risk with low reliance on external debt. However, given the initial stage of the real estate project, the company is exposed to demand and implementation risks in the near to medium term. Progress on the projects and ramp-up in scale and sales booking will be key monitorables.

Liquidity continues to be strong though it has moderated from past levels, and is supported primarily by large unencumbered liquid investments of around Rs 375 crore in mutual funds and fixed deposits and cash and bank balances of Rs 81 crore, as on September 30, 2019. Total cash and equivalents including liquid investments grew to Rs 497 crore as of December 31, 2019. Bank limit utilisation was high and averaged 81% during the six months through January 2020. Capex needs are expected to be moderate while annual long-term debt obligation is well spaced out with lower repayment of Rs 372 crore in fiscal 2020, as compared to Rs 589 crore in fiscal 2019; these are expected to be met through a mix of cash accrual and additional debt. Liquidity has enhanced from the Rs 350 crore of land sale proceeds, which has been used for debt reduction and ongoing rebalancing of its debt mix, in favour of long-term debt.

Rating sensitivity factors
Upward Factors
* Significant and sustained improvement in operating performance
* Faster-than-anticipated debt reduction to under Rs 600 crore, benefitting metrics

Downward Factors
* Regulatory issues in demerger or moderation in the business risk profile, impacting profitability and cash flow
* Delay in deleveraging plans, leading to continued high debt of over Rs 1,000 crore, also leading to constant modest credit metrics
* Lower-than-expected sales and cash flow from the ongoing real estate project.

Incorporated in 1925, Raymond is one of the leading integrated producers of worsted suiting fabrics globally. On a standalone basis, the company manufactures fabric, with total production capacity of 38 million metre per annum. It offers more than 20,000 designs and colours of suiting fabric, and exports to over 55 countries.
 
The company operates in two major segments: lifestyle and non-lifestyle. Lifestyle includes suiting, garments, apparel, and shirting while non-lifestyle includes denim and engineering businesses (tools and hardware, and automotive components). Tools and hardware business comprises manufacturing steel files and cutting tools and marketing of hand tools and power tools accessories. Raymond has 19 plants across Maharashtra, Gujarat, Madhya Pradesh, and Karnataka. As on September 30, 2019, the promoters held about 44% stake, followed by financial institutions (28%), and the general public (28%).
 
On a consolidated basis, for the first nine months ended December 31, 2019, Raymond's net profit after tax (PAT) was Rs 271 crore as net sales reached Rs 5,204 crore against Rs 107 crore and Rs 4,774 crore, respectively, for the first nine months ended December 31, 2018. 

Any other information: Not applicable